Tuesday, February 16, 2010

Simon Properties makes a bid for General Growth, shouldn't have mentioned "accretive" (GGWPQ.PK, SPG)

As in, "immediately accretive to" current year results.  That sentence alone could make current stakeholders demand a higher deal price.

Simon Properties (SPG), not having heard back from General Growth's (GGWPQ.PK) management, went public with an offer to "acquire" the company out of bankruptcy.  Even though the portion offered to common stockholders is about $9, the stock is flying this morning to about 11.07, due to massive short covering.  Other longs are buying in simply to kill the shorts.

It's no accident that Simon is not waiting for General Growth to exit bankruptcy.  While they're still in the restructuring process, the game is different than it would be outside the court. For starters, there's the equity component.  The debate has raged for months over what General Growth's common stock will be worth post-bankruptcy.  Hovde Capital thinks there will be less to go around for equity holders than markets are pricing in, which is why they're short the common stock and put together the presentation near the bottom of this page.

Simon, for one, agrees in part with Hovde, and is offering about $9 per share for the common stock, versus the $9.42 it closed at Friday.  The market is laughing at this price.

They reason that the "takeover premium" is not only priced in, but overpriced:
"We believe the current trading value of GGP's common already includes a takeover premium, and given its high percentage of insider ownership and the fact that the stock trades in an over-the-counter securities market, reflects a price that cannot be realized in a stand alone reorganization.  Any reorganization has a highly uncertain outcome which can be achieved only after an extended period of time, while incurring considerable additional expense, and may result in significant dilution of the current equity holders to the extent creditor claims are satisfied through the issuance of additional equity and/or GGP is recapitalized with proceeds from the issuance of new equity."
Simon is offering to speed up the reorganization process, especially as it relates to the unsecured creditors.  These folks would have converted their notes into equity in the post-bankruptcy company, and if anything this would have created more uncertainty for the current equity holders also.  These unsecured creditors can be made whole (paid back in full) on notes that traded in the 60cent on the dollar range just last summer.  Nice work if you can get it.  The Rouse notes cited below are trading at 106cents on the dollar today to reflect par plus accrued dividends and interest:
Simon's offer would provide a 100% cash recovery of par value plus accrued interest and dividends to all General Growth unsecured creditors, the holders of its trust preferred securities, the lenders under its credit facility, the holders of its Exchangeable Senior Notes and the holders of Rouse bonds, immediately upon the effectiveness of a definitive transaction agreement.  This consideration to creditors totals approximately $7 billion.

Whitney Tilson of T2 advisors and William Ackman of Pershing Square are heavily invested in the common stock of General Growth and think it's worth multiples of the current price.  That said, they're heavily involved as creditors too, so would realize full value on their debt. We'll see how this works out, with different people at different places in the capital structure trying to get full and fair prices.

Simon for one knows this is a great deal, able to confidently predict that this will be "immediately accretive to its Funds From Operations in the first year after closing."

That quote above might in itself be a deal breaker, as purchasing an operator of malls during the worst real estate recession in history might not be expected to be accretive in year one...

For those interested.

Ackman's argument that the common stock has upside:
GGP Presentation 5.27.2009

And Hovde Capital's argument that common shareholders will be disappointed...
General Growth Properties
Copyright 2010 AlphaNinja

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